WorldCom's Audacious Failure and Its Toll on an Industry

By KEN BELSON

Published: January 18, 2005

Few executives have helped create and then watched the destruction of as much wealth as Bernard J. Ebbers, the former chief executive of WorldCom.

With resolve and salesmanship, but little training in finance or engineering, Mr. Ebbers built one of the world's largest telecommunications companies -- at its peak worth $160 billion. Now, with WorldCom in tatters, he stands accused of masterminding a record $11 billion accounting fraud that toppled the company he created and left investors, former employees and others to pick up the pieces.

It was the largest bankruptcy ever, measured by WorldCom's $107 billion in assets at the time of its filing for bankruptcy protection in July 2002. And the fallout from WorldCom's implosion includes many other telecommunications companies that staggered or collapsed, in part from trying to keep up with the phantom growth pace set by WorldCom.

Once heralded as an outsider who bucked the system and won, Mr. Ebbers has become an outsider in the truest sense: He is millions of dollars in debt, has been widely assailed for his excesses and is treated as an outcast even by some in Mississippi, where WorldCom had its headquarters and where he was once held in esteem for his pluck and foresight.

As far as he has fallen, Mr. Ebbers could lose still more if he is convicted of conspiracy, securities fraud and filing false financial reports in a criminal case scheduled to begin today in United States District Court in Manhattan with preliminary motions and the beginning of jury selection. The trial is expected to last about two months. If convicted on all counts, Mr. Ebbers, 63, faces a prison sentence as long as 85 years.

Regardless of the case's outcome, Mr. Ebbers's business demise continues to reverberate well beyond the courtroom. WorldCom -- doing business again as MCI, the company's original name -- is half its former size and struggling to survive. And whether or not one believes that he masterminded an accounting fraud, there is little doubt that the telecommunications industry, whose 1990's boom Mr. Ebbers help fuel with his deal making, is in a shambles -- riddled with heavy debt, sagging stock prices and network overcapacity.

Phone carriers, emerging from the financial ruins, are relying less on the long-distance and data services that Mr. Ebbers championed, and more on bundles of products like wireless and video that can attract customers with deeper pockets.

More broadly, corporate America is coming to terms with life after WorldCom. The company's downfall led Congress to answer critics' calls for action by reviving stalled legislation that became the Sarbanes-Oxley Act of 2002, a sweeping piece of corporate reform legislation. Companies of all sorts are spending millions of dollars to comply with the law, which has increased accountability but, critics say, also stifles innovation.

''Every publicly traded company can thank Bernie Ebbers for Sarbanes-Oxley and the handcuffs they operate under today,'' said Scott C. Cleland, a telecommunications analyst at the Precursor Group. ''It's everyoneelse's punishment for his misdeeds.''

Perhaps those hardest hit, though, are not in boardrooms, but the thousands of former WorldCom employees like Bill Walters, who lost both their jobs and their insurance and pensions. Many of their savings were wiped out by the collapse in the price of the company's stock, and some are still struggling to find work.

Mr. Walters, 51, who was a network engineer at WorldCom for 18 years, is relatively lucky. He lost his $300,000 pension, but found work as a technician six months after he was laid off. Happy for the income, he commuted to Houston, returning home to Dallas on weekends to see his wife and two children.

But his wife lost her job at Southwest Airlines, and the stress of living apart became too much. He moved home a few weeks ago and now works as a carpenter installing cabinets. Every Friday, he and a dozen or so former WorldCom colleagues meet for lunch at a local restaurant to commiserate, network and wonder what went wrong.

''At WorldCom, all they talked about was loyalty,'' Mr. Walters said. ''But there's no security, and I doubt there ever will be. We're like an old pencil: You throw it out when it gets too short.''

Of course, WorldCom did not cause such hardship alone. Global Crossing and 360networks were among many other telecommunications companies that built wildly in the 1990's, and Wall Street investment bankers eagerly financed their fantastic projects. The bankers in turn promoted the sale of shares and bonds to investors eager to believe the promises of unending gains.

But Mr. Ebbers was at the center of so much during the telecommunications bubble that he has drawn much blame for its collapse, and not only because of the scale and audacity of the accounting fraud that five of Mr. Ebbers's former subordinates have admitted, or the size of WorldCom's bankruptcy.

He engendered deep and lingering resentment in the industry for the brash way he took over companies and the aggressive tactics he used to win contracts and meet profit targets. WorldCom was also among the most vocal cheerleaders for the Internet and the billions of dollars it was supposed to spawn for businesses.